Housing crisis hurts Rust Belt more than Sun Belt

WASHINGTON (Reuters) - The U.S. housing crisis has done deep and lasting economic injury to Rust Belt cities of the Midwest, which will take longer to recover than former Sun Belt boomtowns of the South and West.

Mark Seifert (L), and Lindsey Sacher (R), of the non-profit group East Side Organizing Project (ESOP), approach a home in the Cleveland, Ohio neighborhood of Slavic Village in this picture taken February 8, 2008. REUTERS/Nick Carey

Home prices are falling and mortgage foreclosures are rising quickly in both regions, but as researchers weigh the local impact, they worry that cities such as Cleveland and Detroit are less able to bounce back than, say, Las Vegas and San Diego.

“Both the Rust Belt and the Sun Belt are seeing significant declines in house prices, but the underlying economic issues are very different,” said Andrew Jakabovics, an associate director at the Center for American Progress, a think tank.

The difference is that Sun Belt metropolitan areas will continue to enjoy inward migration and growth after the housing slump eventually eases, but the Rust Belt likely will not, limiting its ability to fill a surplus of vacant homes.

“I expect the hardest hit places to be those such as Ohio and Michigan where the foreclosure crisis was driven by serious, if not permanent, economic downturns, ” said Katherine Porter, associate professor at the University of Iowa College of Law.

Nevada posted the highest foreclosure rate in the country in May, followed by California, Arizona, Florida, Michigan, Georgia, Colorado, Massachusetts and Ohio, according to foreclosure data firm RealtyTrac Inc.

But Nevada, Florida, Georgia, Colorado and Arizona have some of the nation’s fastest population growth rates while the population of Michigan is shrinking and Ohio’s is flat.

“These states can’t rely on population migration or job growth to help them recover from foreclosures,” Porter said.


The regional character of the housing crisis has always been apparent. In the Southeast and Southwest, where home prices zoomed the highest, they are now falling the fastest.

Many owners are ‘underwater,’ or left with mortgages bigger than the market value of their homes. Some are simply walking away from their properties and mailing the keys to the bank.

Some homeowners are delinquent, or unable to make the payments on costly, exotic mortgages they took out during the boom. In these cases, if loan terms can’t be modified, banks are taking houses back from owners in foreclosure proceedings.

The result is a glut of empty houses, with construction of new units down sharply. Of the roughly 129 million housing units nationwide, 18.5 million were vacant in the first quarter of 2008, up from 17.5 million a year earlier.

“Miami is going to have too many condos for quite a while,” said Martin Bailey, a senior fellow at the Brookings Institution and former chairman of the Council of Economic Advisers during the Clinton administration.

“There are some glimmers that the housing market may be stabilizing ... It will take a couple of years to work through the overhang in the housing market,” Bailey said. “It may bottom out in the third or fourth quarter of this year.”

If cities like Miami, Atlanta and Phoenix can ride out the slump, their real estate markets should recover over time and vacant units will gradually fill up.

But in some Rust Belt communities like Cleveland’s Slavic Village, where the copper pipes in a foreclosed home may be worth more than the home itself, different outcomes may await.

“The sad truth is that in economically stagnant places, the value of foreclosed properties is often the value of the land less the cost of demolishing the structure,” Jakabovics said.

In Washington, lawmakers are trying to help distressed areas.

The House of Representatives already passed a bill that would channel $15 billion in loans and grants to state and local governments for buying and fixing foreclosed homes. The Bush administration has vowed to veto the House bill.

The Senate has moved more slowly on tackling the housing crisis. On Tuesday, some Senate leaders said they had agreed on a housing bill that includes $3.9 billion for communities hit hardest by foreclosures and delinquencies.

Both chambers are also working on a broader bill to create a $300 billion rescue fund for troubled mortgages.

Reporting by Kevin Drawbaugh